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JCP Bankruptcy: How Much Will Unsecured Creditors Get?

There are plenty of fireworks behind the scenes in the J.C. Penney bankruptcy.

On Monday, new developments in the mass merchant’s bankruptcy saga detailed the bitter fighting between lenders and hinted at what kind of recovery unsecured creditors might expect to receive.

At the virtual conference, Seth Van Aalten from Cole Schotz, representing the committee of unsecured creditors, told bankruptcy Judge David Jones, who is overseeing the JCP case, that “unsecured creditors will receive very little, if any, value for their ongoing support.”

Among JCP’s top five unsecured trade claims, the fashion firms high up on the list include: Nike Inc., Beaverton, Ore., $32.1 million; Alfred Dunner Inc., New York, N.Y., $14.2 million; Byer California, San Francisco, Calif., $12.6 million; Adidas Distributing, Portland, Ore., $7.1 million, and Haggar Clothing Co., Farmers Branch, Tex., $6.1 million.

Van Aalten added that Simon Property Group and Brookfield Asset Management, the mass merchant’s two largest landlords, are pushing to own the operating component of JCP before the holiday season is fully under way.

The current plan is to sell the real estate assets to a majority group of first-lien lenders, with 160 stores placed into one real estate investment trust and the six distribution centers into another REIT, the component call PropCo. Simon and Brookfield would purchase the operating component of JCP, which runs the stores and is referred to as OpCo. The transaction, which includes a credit bid, is valued at $1.75 billion, with the landlords contributing $300 million and assuming $500 million in debt.

JCP bankruptcy counsel Joshua Sussberg of Kirkland & Ellis told Judge Jones that the parties are working on the final documentation of the master lease now that outstanding issues have been resolved through mediation and the assistance of bankruptcy Judge Marvin Iskur. The attorney emphasized that the parties have been focused on “maximizing the value of this enterprise. Under these circumstances, that means one thing and one thing only—achieving a going-concern transaction.” He emphasized such a resolution would help to save 60,000 jobs, provide a tenant for many landlords and maintain a trade partner for many vendors.

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But the status conference was also fraught with two different lending factions fighting over recovery rates.

Late in the bankruptcy, a group of minority first-lien lenders who were dissatisfied with their recovery under the proposed PropCo-OpCo plan of sale elected to submit an $750 million offer of their own for the PropCo component of JCP’s real estate assets. Sussberg addressed the offer at the status conference, noting that the proposal is “not consistent” with the fiduciary duty to maximize value and that “they think they can plug into the Simon and Brookfield transaction.” Sussberg emphasized to Judge Jones that the complicated deal is actually one transaction, even though it is referred as two components.

He referred to the disagreement between the two lending groups as an inter-lender dispute. Sussberg also gave a reason why the minority group’s bid for PropCo stands little chance for success. The key claim is that the OpCo sale can only be approved on Monday, Nov. 2, together with a master lease, the document that the landlords are finalizing with the group of majority first-lien lenders, led by H/2 Capital Partners, which provided the retailer with its debtor-in-possession financing.

Philip Dublin from Akin Gump Strauss Hauer & Feld, representing the minority group, disclosed that his clients learned before the status conference that neither Simon nor Brookfield would do a transaction with them, and that it now has just six days until the Nov. 2 sale hearing to find itself an operating partner. He sought to convince the judge that the PropCo-OpCo deal was an “artificially integrated bid” to help members of the DIP lending group to “line their own pockets,” noting that the motive was “greed, greed, greed.”

Documents filed with the court suggested that the minority group bid led by Aurelius Capital provides the DIP lenders with a 100 percent recovery, instead of the 162.4 percent it calculated was in the proposed plan, a recovery that Dublin described as “exhorbitant.” He also went as far as calling the dispute between the opposing majority and minority first-lien groups as “lender-on-lender violence.”

“Lender-on-lender violence couldn’t be further from the truth….What we see here is economic terrorism,” said Andrew Leblanc, the partner at Milbank representing the majority first-lien group. “We tried for five months to get a transaction that works. We would have loved for the debtors to have an alternative that didn’t require us to step in and operate as a PropCo-Opco, one of the most complicated deals in the retail space. The last 32 days we’ve engaged in mediation with Judge Iskur [and have been] on the phone on a daily basis, sometimes throughout the night to put forth a transaction to salvage jobs.”

Leblanc emphasized that the minority group of lenders are looking for a payout and not trying to save jobs, using the threat of liquidation to extract a premium. “We encourage the court to go through with the sale process and allow the sale to go through,” he said.

Sussberg, given the opportunity to respond, said: “We will not let this company liquidate and we have said this over and over again to anyone who will listen.”

As for other bidders who were circling around JCP, which over the summer were identified as Sycamore Partners and Hudson’s Bay CEO Richard Baker, Sussberg said they simply wanted to be an operator to the lenders. “If someone had a better alternative, they had plenty of time to raise it,” the JCP attorney said.